Enterprise Development Fund establishment; transfer of payments: DSBD progress report; SEFA on its Business Rescue Strategy; with the Minister

14 February 2018

Chairperson: Ms N Bhengu (ANC)

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Meeting Summary

The Small Enterprise Finance Agency (SEFA) admitted that it was unable to report positive progress on the establishment of the Enterprise Development Fund, as it had not obtained the Black Economic Empowerment (BEE) facilitator status which it needed to establish the fund. The Department of Small Business Development (DSBD) said alternatives had to be considered or else no progress would be made towards establishing the Fund. SEFA would need to collaborate with the private sector to get funds to support small businesses, and work with other government departments and Development Finance Institutions (DFIs).

Members asked about SEFA’s partnership track record; who the Fund’s beneficiaries would be; the purpose of the BEE facilitator status requirement; reasons for the Department of Trade and Industry (DTI) not granting the facilitator status, and if there were alternatives to establishing the fund without getting the status; what steps SEFA had taken to approach the private sector for funds; what arrangement SEFA was anticipating with its donors and clients; and whether there were measures to ensure that funds set aside for small business development were used for that purpose.

The Chairperson noted that by 2030, 9.9 million new jobs needed to be provided through small businesses. Therefore, this fund had to be established. It could not be an open-ended target. If an obstacle for small businesses was lack of access to funding and the intervention for that was the establishment of the Enterprise Development Fund, a timeframe should be set. SEFA was asked to set such a timeframe. The Chairperson said that if the BEE facilitator status was the key to providing enterprises with funds, then getting that status had to be prioritised. SEFA and the Department were asked to return with a progress report in four weeks. The Committee indicated it was not impressed with SEFA and the Department’s performance and lack of planning

The Department briefed the Committee about its portfolio architecture, which had the following objectives:

To foster alignment between small business policy and broader government economic policy. To do this, the Department had looked at policies such as the National Development Plan (NDP), the Industrial Policy Action Plan (IPAP) and the Medium Term Strategic Framework (MTSF);

To provide a platform for integrated planning between the Department and its entities -- SEFA and the Small Enterprise Development Agency (SEDA);

To develop and implement an integrated platform for programme design, implementation, monitoring and evaluation. This would eliminate duplication between the Department and its agencies;

To build strategic partnerships with the private sector and other small, medium and micro enterprise (SMME) stakeholders

Members commented that the presentation bore a striking resemblance to the Sizwe Ntsaluba Gobodo report which had been presented to the Department in October 2015. They commended the Department for focusing on strategies, monitoring and evaluation, but were not pleased that the Department was planning to distribute large amounts of money through its agencies.

Members asked whether the DSBD’s agencies were best placed to manage funds allocated for small business development; how it intended implementing its plan to merge the functions of the provision of non-financial support by SEDA with the financial support of SEFA; and what support it was giving to cooperatives and informal traders, like spaza shops. The Chairperson said the Department must provide a written report on its commitments to cooperatives’ development within a week. A cooperative development agency must be established.

SEFA spoke generally about its business rescue strategy. Essentially, it did not initiate business rescue for defaulting debtors but participated in business rescue proceedings due to the challenges faced by small businesses, and preferred to restructure debt timeously. It also described its remedial actions on litigated projects in the Free State.

The Chairperson asked the Department and its agencies to report at the next meeting on whether their work was responding to the problems faced by small businesses.

Meeting report

Opening Remarks

Ms Edith Vries, Director General: Department of Small Business Development (DSBD), said the Department worked with a tracking tool all the time. It was initially not clear on what was required and had tried getting clarity by preparing a presentation on the Small Medium and Micro-Enterprises (SMME) Innovation Fund. It had then realised that a presentation on that Fund was not required, because it was a historical matter that had been on the agenda since 2014. The Department worked with the Small Enterprise Finance Agency (SEFA), so Ms Vries had asked SEFA to do the presentation.

The Chairperson asked the content advisor to speak on the matter.

Committee Content Adviser, said that the Department had not consulted him to seek clarity on the Enterprise Development Fund. However, the Fund was one of the recommendations of the Committee on its tracking tool. The Chairperson and Mr R Chance (DA) had previously spoken about this fund. He did not understand what clarity Ms Vries needed on resolution 54.

Ms Vries stated that she was not sure how to respond to that, and asked Mr Thakhani Makhuvha, Chief Executive Officer (CEO) of SEFA, to proceed.

Before the presentation began, Mr H Kruger (DA) requested that the Committee be given the tracking tool and that the Committee be given updates when progress was made on the tracking tool ,as this was currently not being done.

The Chairperson asked the Committee secretary to retrieve the tracking tool for Committee Members and attendees to view, in order to understand SEFA’s presentation. The Chairperson requested that in future the Department must ask for clarity when it was uncertain about what it was required to present on. The tracking tool stated that the Department was supposed to engage with development finance institutions (DFIs) and private sector financial players on how they could establish a venture or start-up capital fund. This was to be done by fourth quarter of 2015/2016 financial year. The Department had then reported to the Committee that it was in the process of establishing an enterprise development fund geared towards supporting start-up businesses. The fund was to be implemented by SEFA once it was given its Black Economic Empowerment (BEE) facilitator status. The the Committee expected a progress report on the establishment the fund and who was responsible for its implementation, as the tracking tool showed that this had not been achieved by the fourth quarter of the 2015/2016 period. The Chairperson had provided clarity on what was required of the Department, therefore there was no need to retrieve the tracking tool.

Progress on establishment of an Enterprise Development Fund

Mr Makhuvha said he did not have a positive update on what SEFA had been trying to do since the start of the tracking tool. Since there was insufficient funding from the fiscus, the DSBD and SEFA needed to approach the private sector for funding so that SEFA could manage the funds on their behalf. In return, private sector players benefited by acquiring BEE status. SEFA needed to engage with the Department of Trade and Industry (DTI), which gave the BEE status. SEFA’s aim was to create linkages with the private sector to obtain funds to support small businesses. This meant that SEFA needed to collaborate with large corporations that had corporate social investment funds, but did not lend money to small businesses. SEFA could help by using the funds from corporations to support small businesses. This entailed the development of strategies to provide financial and non-financial support to small, medium and micro enterprises (SMMEs). SEFA planned on working with technical experts, strategic industry bodies and other DFIs like the Industrial Development Corporation (IDC), the National Empowerment Fund (NEF) and provincial development financing institutions for financial support, and working with its sister Small Enterprise development Agency (SEDA) for non-financial support.

When SEFA received funds from state organisations, the process of managing the funds tended to be easier. For example, for ten years SEFA had been managing the Land Reform Empowerment Fund on behalf of the Department of Rural Development and Land Reform (DRDLR) to support agricultural businesses to buy machinery, and to use the funds for working capital. Also, through the DSBD, SEFA had sourced grants of €30 million for on-lending, and €5 million for technical assistance to assist SMME growth and to promote employment. However, these funds did not require the formalities of the Enterprise Development Fund.

Mr Makhuvha said that SEFA was the appropriate agency to manage the fund because it was a government agency created for that purpose. There was no funding allocation for SEFA, so if it was given funding by the private sector it could increase economic activities in the country and address the triple challenge of poverty, inequality and unemployment through public and private partnerships. SEFA would manage the under-utilised lending infrastructure to support SMMEs and corporations by partnering with multiple organisations. By managing the fund, SEFA could promote the integrated service delivery model between SEFA and SEDA, which was aimed at offering financial and non-financial support to SMMEs. The biggest obstacle was that SEFA had still not been granted the Broad-based Black Economic Empowerment (BBBEE) facilitator status by the DTI, although it had applied for that status over a year ago. SEFA had to submit multiple documents for its application to be considered. When the application was lodged, SEFA was on level three of the normal BEE status, but had now been moved to level one. SEFA was still waiting for the BBBEE facilitator status to be granted because without the status, the fund could not be established. On behalf of SEFA, Ms Vries had engaged with the Director General of the DTI with no success.

Mr Makhuvha asked Ms Vries to expand on the matter, as the process of obtaining the BBBEE facilitator status had taken much longer than had been anticipated. As previously stated, this was not a good report.

Ms Vries commented that obtaining facilitator status had been an issue even before she took office. When SEFA reported that it was still waiting for a response from the DTI, she had intervened by making a written application to the DTI, but that did not get a response. SEFA had also engaged with the DTI. The Director General of the DTI had told Ms Vries that the Act was very specific about the granting of BEE status. The status was granted by the Minister of the DTI, and not the departmental officials, because there was great risk associated with this task. For example, the status was granted to a DFI through its partnership with certain companies, which almost compromised the status. Once the Industrial Development Corporation (IDC) had taken a share in a deal with an entity, it could be granted BEE points. This had been the first clear communication from the DTI.

While SEFA was waiting for the status to be approved, it had to register the fund and show the articles of incorporation for consideration by the DTI. This had never been communicated in writing to Ms Vries or SEFA. She had promised to follow up on the matter. She had received the above response when she asked the DTI why SEFA, as a state agency, had to follow the same route as other entities applying for this status. The Department needed to go back to the drawing board. A report on this matter to the Committee was long overdue. The Department undermined its mandate because it followed one path and did not consider alternatives. This was not a positive progress report, and did not reflect well on the Department.

She asked for more time to give the Department’s legal team an opportunity to study the BEE legislation and then engage with the DTI from an informed perspective.

Discussion

Mr X Mabasa (ANC) asked for clarity on SEFA’s partnership track record through multiple instruments which SMMEs required over their development cycle. Also, was there a difference between what the DTI and the Department of Labour offered? Overall, who benefited if the fund was established?

Mr Chance asked what was meant by “facilitator status,” and what it meant to be a facilitator. If not getting the status was the blockage for not starting the fund, why was it taking so long to get the facilitator status? In the intervening months, what steps had SEFA taken to approach the private sector and other donors for funds in preparation for the establishment of the fund? What had been the outcome of those discussions in terms of the amount of money that had been pledged, and from whom? Most enterprise development funds in corporations were grants for which no return was expected. SEFA was a lending organisation which expected its loans to be repaid with interest. Therefore, what arrangement was SEFA anticipating with its donors? The donors wanted to get points from SEFA by giving it donations and that was why SEFA needed the BEE facilitator status, otherwise the donors could not get the points. Was SEFA expected to pay the donors back? Would interest be charged on the repayments? What happened if SEFA’s clients did not pay the money back? How were the donors going to hold SEFA accountable for the money given to it?

Mr Kruger said it seemed like capital set aside for enterprise development in the government was lying around in each department. The answer given in previous discussions around this topic was that there were transversal agreements between departments, and that the agencies were merely facilitators of these funds. He was also a member of the Agriculture Committee. There was no agreement between the Department of Agriculture and the DSBD. What was the Department doing to ensure that the money set out for small business development was actually spent on it, because it seemed the latest trend in government was to set money aside for small business development, but the money did not land up in the right pockets.

SEFA’s Response

Mr Makhuvha responded to Mr Mabasa’s first question by saying that over the years, SEFA had partnered with the Department of Rural Development and Land Reform (DRDLR) for over ten years to manage the Land Reform Empowerment Fund through its predecessor institution. SEFA managed the fund by identifying enterprises that needed support. Some of the enterprises were beneficiaries of land claims. Others needed working capital, machinery, plant and equipment, tractors, etc. This was an example of SEFA’s partnership track record. SEFA had also partnered with Anglo Zimele to create a fund called the Anglo American SEFA Mining Fund. The fund was previously called Anglo American Khula Mining Fund. SEFA had inherited the fund from its predecessor, Khula. SEFA and Anglo had each contributed R100 million. The first round of the fund had been successful, so it had been recapitalised with R100 million each from SEFA and Anglo. The fund was approaching the end of its term. It helped emerging small scale miners for exploration. There was also a tripartite agreement between SEFA, Transnet and Anglo Zimele. That fund benefits those who supply contracts to Transnet.

SEFA had also partnered with Coca Cola for a project called ‘business in a box,’ which entailed SEFA supporting small enterprises that run their businesses as a containerised spaza shop. The project operated in Thabong, Meloding and Masilo in Rustenberg. SEFA had also partnered with food produce markets which Committee Members had visited in Mangaung, Durban and Springs.

In response to Mr Mabasa’s question on who benefited if the fund was established, Mr Makhuvha said that SEFA, corporations and enterprises benefited. SEFA benefited by ensuring that amidst difficulty to get developmental funding from the fiscus, it sourced funds elsewhere. It received scarce resources in the form of capital funds to manage on behalf of companies. Companies generally had enterprise development programmes and wanted to benefit from supporting enterprises. Companies could not implement their programmes because they generally did not have divisions which gave loans to small businesses. SEFA as a lender which had a licence from the National Credit Regulator, could use the funds from corporations to lend money to small businesses. Companies which contributed to the fund got scores on their BBBEE score cards by virtue of their money being managed by SEFA and loaned to small businesses. SEFA benefited in that despite not having funds, it managed funds belonging to other entities, it charged a management fee and helped with the development impact. SMMEs and cooperatives benefited in that they receive funding to run their businesses.

Mr Makhuvha then responded to the question on the difference between what the DSBD and the Department of Labour (DoL) offered by saying that the DoL had an activation programme which focused on training, while the DSBD programme focused on supporting SMMEs and cooperatives with loans. He was uncertain about which programme at the DoL Mr Mabasa was referring, but noted the non-financial support which the DoL provided.

In response to Mr Chance’s question on facilitator status, Mr Makhuvha said that the status allowed SEFA to manage funds for institutions which would benefit from the BBBEE status while assisting small businesses. An institution was given the facilitator status after assessments were done to ensure that the institution was capable of giving loans. corporations could not benefit from contributing to the fund if SEFA did not have the facilitator status. The process had taken too long. Ms Vries had earlier suggested establishing a fund, but many processes had to be followed to develop a fund. For example, National Treasury and the Department must agree to it, and the fund had to be registered with the Master of the High Court. To avoid this process, SEFA had opted to wait for the facilitator status to be approved, but that had taken longer than anticipated.

Mr Makhuvha responded to the question about who SEFA had been engaging with. It would continue engaging about more programmes with institutions mentioned earlier -- for example, Coca Cola and Transnet -- while waiting for facilitator status. It had not been rigorously engaging with corporates, although there were a number of corporations that had expressed an interest in contributing funding. Engagements had been informal, because companies were not willing to work with an agency that did not have the facilitator status. As soon as SEFA received that status, it could identify its donors and clients and determine the consequences for defaulting clients. Once the fund was established, SEFA could determine the objectives and the kind of clients the fund was for. For example, a corporate in the steel industry may want its funding directed at an enterprise in the same industry. The model was not yet designed, but would be finalised as soon as the facilitator status was granted.

Ms Vries discussed the difference between Enterprise and Supplier Development (ESD) funding and SEFA funding. ESD funding was a grant, while SEFA funding was a loan. Was there a model that SEFA had created, showing the work that it was doing for the Department? The Department should not have to wait so long for the facilitator status to be granted to establish the fund. When the Department approaches corporations, it should at least have a model outlining how the fund would work. If it was taking over two years to get BEE status, how long would the actual establishment of the fund take? The DTI was reluctant to award the status because it realised that if corporations invested in this fund, they would expect BEE accreditation. This was a risk for the DTI, which wants to uphold the integrity of the Broad-Based Black Economic Empowerment Act (BBBEE Act). How would the DTI, as custodians of the BBBEE Act, uphold the integrity of the Act if it shared its mandate with an entity that had the BEE facilitator status? The DTI had mentioned a number of other DFIs that had applied for facilitator status. It really had to apply its mind when considering these applications. If the status was awarded to SEFA, there would be conditions, and the status would be awarded for a limited period.

Ms Vries said that the meeting showed that SEFA’s thought processes had been limited, because to start the next step, the status needed to be granted. It had not been considered whether that was actually the right path. More work needed to be done, so the Department would further engage with SEFA and not be too technical about it.

In response to Mr Kruger’s question about funds for development spread across departments, she conceded that was true. In the previous financial year, R15.5 billion had been made available for direct funding to SMMEs. There might be a lot more than that. In response to the question on whether the Department had an agreement with the Department of Agriculture, it did not. When the DSBD was established, she had been the Director General of the Department of Agriculture, and was thus best placed to comment on Mr Kruger’s question. Provincial agriculture departments supported smallholder farmers, and over R3.5 billion had been allocated for them. However, smallholder farmers were seldom viewed as potential business enterprises. Reaching an agreement had been difficult, because the DSBD had taken over a year to appoint its Director General, but discussions were progressing. She agreed to work with the Department of Rural Development and Land Reform.

Ms Vries said that the DSBD guided other departments on how to spend their money on the creation and growth of SMMEs. For over two years, it had had a national inter-departmental coordination meeting. The Department was targeting departments that were in the economic cluster, the Department of Social Development, the Department of Human Settlements and the Department of Public Works. There was 80% attendance by invited departments at these meetings. The meetings allowed departments to build relationships, since the development mandate was shared by departments. Meetings were held quarterly and departments shared models and best practices.

The DSBD had revived the definitions in the Small Business Act. The Bill would take a while before it reached the Committee, but the definitions would be published as regulations. Before 31 March 2018, the 11 departments mentioned in the Act would be asked whether they would provide support if the definitions were taken to the cluster as regulations. That would be a formal way of providing guidance. Generally, when guidelines were provided, they were not deemed compulsory, but that changed when the guidelines became regulations.

Mr Kruger commented that the Department was supposed to know what the best practices were. What did the Department know about financing different business developments in different sectors, like farming and rural development? Having agreements between departments should be considered because this would serve the needs of small businesses, especially in the rural areas.

Mr Chance said it was absurd that nothing had been done over the past two years, and that SEFA did not have a business model for the fund. An explanation was required, because corporations would not give money to SEFA if they did not know how the money would be used.

The Chairperson observed that the Committee had not got what it wanted. In the fourth quarter of the 2015/2016 financial year, the Enterprise Development Fund (EDF) was supposed to have been established. The report given to the Committee in 2015/2016 had shown that the milestone had not been achieved. How much time had SEFA set out to establish the EDF, and what were the milestones? How much time had they set out to get the BEE status? If SEFA had planned, it would have known the requirements and timeframe to get the facilitator status. A project without a plan could not be easily achieved. The Chairperson asked for an honest answer, because every time the Department, SEFA and the Small Enterprise Development Agency (SEDA) reported to the Committee, there was no project management plan. As a result, those three entities did not achieve their goals timeously. The Chairperson asked for a timeframe from SEFA so that a date could be set for a progress report on the establishment of the EDF.

Mr Makhuvha responded that in hindsight, the establishment of the fund had not been planned appropriately. It had thought that getting the BEE status would have been an easy process. More effort was being put into getting the facilitator status, and matters would be straightened out as soon as the status was granted.

The Chairperson commented that by 2030, 9.9 million new jobs needed to be provided through small businesses. The government was working backward from that. Therefore, this fund needed to be established. It could not be an open-ended target. If an obstacle for small businesses was the lack of access to funding and the intervention to that was the establishment of the EDF, a timeframe should be set. SEFA was asked to set a timeframe to make funds available for small businesses, because the fund needed to be established before 2030.

Ms Vries noted that there was no plan or worthwhile milestones, and that was unacceptable. However, Mr Makhuvha could not be expected to set a timeframe at the meeting, because SEFA needed time to think about it.

The Chairperson said it was unacceptable to say that a plan could not be formulated. Parliament had a plan, and the budget speech had to be delivered on 21 February 2018. If the budget speech was not delivered on that day, government could not function because funds could not be allocated. It was unacceptable not to have a plan. What were the reasons for not having a plan?

Mr Makhuvha said the difficulty was in defining when the fund would be established without knowing when it would get the facilitator status. Getting the status was out of SEFA’s control. SEFA would use all means possible to get the DTI to say when it would grant SEFA the facilitator status.

The Chairperson asked whether the DTI was in opposition to SEFA. Did they not fall under the same cluster? What would make it difficult for the DTI to expedite something that was needed by SEFA and the Department? If the DTI was not told that it was in its interests to grant SEFA the facilitator status, it would not understand the urgency of the matter and prioritise granting SEFA the status. Knowing the importance of granting the status, why was the DTI dragging its feet?

Mr Makhuvha said that SEFA would re-engage with the DTI on this matter, and asked for four weeks to report back on this matter.

The Chairperson said that if there had been a plan from the outset, SEFA could have taken other measures when it did not timeously reach its milestone of getting the facilitator status. If SEFA’s discussions with the DTI were informal, they would not prioritise the interests of the country.

Mr Makhuvha responded that while waiting for the status, it had been trying other means to get funds to support SMMEs and cooperatives. In total, the European Union had given SEFA a €35 million grant.

The Chairperson said that if the BEE status was the key to providing enterprises with funds, then getting the status must be prioritised. SEFA and the Department were asked to return in four weeks with a progress report. She told the Minister that the Committee was not pleased with SEFA and the Department’s performance and lack of planning. It was hard to believe that the DTI would have refused to grant SEFA the status if there was clear communication about the urgency of the matter, because the DTI was part of the economic transformation cluster in government.

DSBD on progress of reviewing transfers of payments

Ms Vries said she thinks she had interpreted the Committee’s expectations correctly. The briefing focused on the DSBD’s priorities, and making the Department’s business models with other entities more cost effective, and streamlining the processes.

The Department had established the Small Business Development portfolio between SEFA, SEDA and itself, as they shared a vision which included creating 9.9 million new jobs by 2030. It had designed a Small Business Development portfolio for Architecture. Much of the technical work around this had been done. There was a presentation on the final migration document which took place on 13 February 2018. She introduced Mr Mzoxolo Maki, the Department’s Chief Director:f Enterprise and Supplier Development, to do the presentation, as he headed the project.

Mr Maki outlined the objectives of the Architecture Portfolio as follows:

To foster alignment between small business policy and its broader government economic policy. To do this, the Department looked at policies such as the National Development Plan (NDP), the Industrial Policy Action Plan (IPAP) and the Medium Term Strategic framework (MTSF);

To provide a platform for integrated planning between the Department and its entities (SEFA and SEDA);

To develop and implement an integrated platform for programme design, implementation, monitoring and evaluation. This would eliminate duplication between the Department and its agencies;

To build strategic partnerships with the private sector and other SMME stakeholders

Mr Maki said that the portfolio design was premised on:

The integration of financial and non-financial support throughout the spheres of government;

The facilitation of business support services through local business and entrepreneurial support service centres, called a ‘one stop service’ for entrepreneurs;

Support services being facilitated across the business development phase in specific sectors;

An increase in private sector resources and skills;

A national monitoring and evaluation system that would help with building accountability, measuring effectiveness and efficiency, and communicating and reporting to stakeholders.

Broadly speaking, the structure would be comparable to globally recognised models. To provide a full package to small businesses, the DSBD considered the different phases of the business life cycle. By tailor-making its products and services, the Department could save money. The presentation set out the pre-start-up, start-up, growth, mature and decline phases of a business life cycle and then described the financial and non-financial support the government intended offering. He also mentioned the legislation and policies used to give effect to the support.

Mr Maki said that while it was possible to make an argument for integrating cooperatives into the same value chain as SMMEs, a new approach to cooperatives was needed. The Department favoured a stand-alone structure for cooperatives. Therefore, it would strategically assess ownership of cooperatives and draw on expertise from policy, legislation, programme design, monitoring and evaluation functions from the Department. The DSBD had discharged itself of the the responsibility for establishing the Cooperatives Development Agency, and had assigned it to SEDA. This would remove distractions from the Department and capacitate the cooperatives unit to improve delivery. He then showed a diagram of the integrated cooperatives development model that needed to be implemented by the portfolio. That was followed by a discussion on sector specific programmes. Thereafter, he mentioned the public and private sector stakeholders which the DSBD intended to partner with for support services. He proposed a way forward for improving financial and non-financial support for small enterprises in the presentation.

In conclusions, he said that the DSBD’s financial and non-financial products and services architecture must deliver a programme formulation, planning and implementation methodology that would shape comprehensive instruments that would move small enterprises from the periphery right to the epicenter of economic development. If the Department used agencies for implementation, it could focus on other matters, like formulating policies for the development of small businesses.

Discussion

Mr S Mncwabe (NFP) said he was impressed that the Department would be partnering with tertiary institutions and the Department of Education. It also needed to partner with the National Youth Development Agency (NYDA), because it led the constituency that it was targeting. The NYDA had a database of unemployed graduates, and those were the people that had to be prioritised in the Department’s programme. The youth must be consulted when programmes for them were being created. The NYDA had a similar programme, so the Department could consolidate its programme with that of the NYDA.

Mr Chance said that the presentation was similar to the Sizwe Ntsaluba Gobodo report which had been presented to the Department in October 2015. The Department had had over two years to consider how to align the recommendations with its strategy. Why was it taking so long to develop the portfolio architecture that had merit? There was almost a complete absence of recognition of what was happening in the private sector in the business life cycle. The Department could not do it alone. If 300 000 enterprises could be identified and created, as stated in the presentation, that was not going to happen through the efforts of the state alone. Entrepreneurs and private sector players had to be involved to provide support to small businesses. He praised the Department for focusing on the strategy, monitoring and evaluation, but was not impressed with the fact that it was planning to distribute large amounts of money through its agencies and other functions. Did the agencies provide the most efficient way of spending the allocated funds? The country’s entrepreneurial ecosystem developed by the Aspen Network of Development Entrepreneurs (ANDE) listed many organisations operating in this ecosystem, all providing a variety of specialist services. He did not agree with the Director General’s comment from the previous year that ANDE’s ecosystem was demand side, and the Department’s was supply side. It was not a matter of supply and demand. He advised the Department to take into account the ANDE ecosystem, as it contained organisations that the Department should be partnering with.

He referred to the Catalyst for Growth report on the effectiveness of business development support services, and asked whether it had been taken into account. The proposal to converge financial and non-financial support, which was essentially a merger between the functions of SEFA and SEDA at the local level, made sense, but how would it be implemented? If it was not implemented at the top of the organisational structure, how would it filter through to the local level where delivery happened?

He was impressed with the Department’s approach to trade credit finance, supply chain and credit guarantees. The private sector must be given more help, because the private sector’s supply chain was where many blockages happened, especially in respect of late payments and cash flow problems. He was not impressed with the Department’s approach to the mature stage of the business life cycle, because that was the earliest reference to angel and venture capital funding. Such funding was required at the start-up and early growth phase, not at the mature phase. At the mature phase, funding may be sourced from other institutions, so that part of the presentation must be reconsidered.

He was not pleased with the work the Department intended doing with cooperatives. The proposal did not deal with real problems, like the high failure rate of cooperatives and the fact that money was being thrown at businesses instead of businesses requesting money. The Department had a target to meet of the number of cooperatives that needed to be established, and this had led to a number of cooperatives being formed which then failed when the financial support was withdrawn. There needed to be a greater emphasis on the creation of secondary cooperatives, as they had the scale and capacity to provide the services the primary cooperatives needed. He supported the export-orientated plan, and said that it needed more emphasis.

He noted there was no reference to a relationship with the CEO’s Fund of R1.5 billion, which was committed to by the private sector and established at the end of 2017. Surely this was an opportunity for the DSBD to partner with the private sector as it had promised to do. There was also no reference to a proposal to set up a venture capital fund which the government had previously mentioned on multiple occasions, and the DA had proposed in its 2014 election manifesto. Was tourism included in the Department’s categorisation of business services, because tourism was a major employer, especially for people of relatively low skills, which was what the unemployed consisted of in South Africa? The DTI and United States Agency for International Development (USAID) had invested tens of millions of rands in Finfind. Why had the Department discontinued Finfind, or had it been handed over to another entity?

Mr Kruger said that the presentation had made him feel positive about the Department’s work and goals. However, he was concerned about how the Department was going to implement the portfolio architecture. Had the Department looked at the Committee’s strategic plan, and had it been considered in the portfolio architecture?

Ms Lindiwe Zulu, Minister of Small Business Development, said that since the early presentations with the first Acting Director General at the establishment of the Department, it had been stated that it would take a while to implement a system that everyone was comfortable with. She emphasised that the DSBD was still fairly new. It was a pity that it had taken this long to get this far, but the processes followed were necessary. While developing this portfolio, the Department had had to work with other departments. She did not consider the Department to be new, because they had been able to put systems in place, and had created systems that would respond to the needs of SMMEs. It was a pity that it had taken the Department this long to get to where they were. The processes followed in developing the portfolio architecture had been necessary. The Department had not worked in isolation in developing this portfolio, but had followed other governmental processes, like monitoring and evaluation. It had taken study groups into account in making its presentation to the Committee.

Reports by the Committee were very important to the Department, especially now that the term was coming an end. She was currently dealing with the report on the visit to the Free State. She was looking at the Committee’s recommendations. The current plan had been developed over a year and a half. The Department would like to produce a more concrete report in a few years to come. The Department needed to continue working on the questions raised by the Committee.

The Minister has prioritised establishing a concrete portfolio architecture. Initially she had not been convinced when the Director General had proposed it, but she had become convinced over time. The Department was still deciding on what aspects should be dealt by SEFA and SEDA. There were concerns that all functions would be given to SEFA and SEDA, and the DSBD would be there for nothing. However, these agencies fall under the Department. If the monitoring and evaluation was done well and the Department participated in the strategy meetings, working together would not be difficult. The Minister said she did not want to work frantically. She wanted to know that she could trust the institutions that she worked with and would be able to guide politically, and that the technical aspects and implementation would be done by the institutions. Her task was the oversight function. She asked the Department to comment.

Mr Maki said that with the benefit of hindsight, the Department had realised that the way it had been providing support to small businesses had not been effective. It had been considering how it could improve its support mechanisms to develop a portfolio approach which would allow it to identify businesses at the different stages of the business cycle and provide tailor-made support.

In response to Mr Mncwabe’s question about partnering with the NYDA, the Department had not engaged with the NYDA about the portfolio approach, but would make efforts to do so. Implementing the portfolio approach could not be done by SEFA and SEDA alone, so the DSBD would leverage its strategic partnerships with the private sector, government and its entities. In respect of providing support to start-up businesses, the Department would engage with all relevant stakeholders.

In response to why the Department had taken so long to establish the current approach, some of the recommendations from a previous report had been implemented, and some of the programmes had been moved around -- like the centres for entrepreneurship, which were now run by SEDA. The Department had taken a while to implement the report in its entirety.

In response to the question about the Department not knowing what was happening in the private sector, Mr Maki said that corporations generally preferred working with businesses in the growth and mature stages of the business cycle because those companies were ready to be part of the corporates’ value chains and did not have to be burdened with supporting businesses in the start-up phase, because they still needed to develop through the stages of the business cycle, and most of them could not provide the quality and quantity required by the private sector.

Regarding the number of enterprises that the DSBD needed to develop, Mr Maki said he was aware of a proposal by a company offering to work with the Department to establish as many SMMEs as possible to achieve the goal that the Department was working towards. The government had been trying to forge strategic partnerships that would help it achieve the goals that it had set out for itself.

In response to the question on whether SEFA and SEDA were best placed to disburse the funds, Mr Maki said that the agencies had stated that they would have to assess whether they had the capacity to disburse the funds. For example, with the craft sector programmes whose funds were paid through the Industrial Development Corporation (IDC), the Department planned on moving that programme to SEDA, and SEDA had agreed. Although SEDA was uncertain about whether they had the capacity to take the programme on, the Department was aware that the agencies may not always have the capacity needed. Where this had been identified, the Department would work with the agencies to ensure that they functioned optimally.

Regarding the development of entrepreneurship, the Department had the enterprise incubation programme. It had consulted universities and had had round table discussions about how to develop entrepreneurship in the country. It admitted that the report showed that it had not performed well, so it needed to make a meaningful effort to improve its participation in that regard. The Department was working on a framework which would be based on an integrated strategy for the promotion of businesses. The strategy was currently being reviewed. The Department would include a very strong element on how it and the government would work towards improving entrepreneurship in the country and provide support at the local government level. In the Department’s Local Economic Development (LED) programme, it D had partnered with municipalities and relevant stakeholders from the private sector. The Department would continue to nurture those relationships in order to achieve to its goals at that level of government. The Director General had a coordination forum aimed at engaging with national and provincial government.

The Minister worked with the Minister of Cooperative Governance and Traditional Affairs (CoGTA) in the LED summit. The DSBD was currently looking at the recommendations from the summit which would help in discharging these responsibilities. It was working with the private sector to include entrepreneurs in their value chains. For example, it had engaged with SANTAM and Barloworld.

The Department’s presentation was merely a proposal about how it could improve its services for businesses in the mature stage of the business life cycle, and what it needed to do to improve its corporative support. The cooperatives unit in the DSBD was working to improve the support to secondary cooperatives.

Regarding the CEOs’ fund, the Department had committed to working with the fund, which had the same objectives as the DSBD for developing small businesses. The fund was interested in working with businesses in the growth and mature stages of the business life cycle. The Department intended to nurture its relationship with the CEOs’ fund. It had been engaging with the Department of Science and Technology (DST) and National Treasury about the SMME fund. Components of the fund included venture capital and other types of funding aimed at the different stages of the business life cycle. The Department would brief the Committee on this fund in the near future.

Mr Maki said that the Department was targeting the tourism sector.

In response to the question on Finfind, he said that Finfind had not been continued. Finfind worked on what the Department intended to develop, like establishing an SMME database and rating system. The Sector Education and Training Authority (SETA) was working on an on-line ecosystem aimed at providing support to small businesses. The DSBD was aware that the abovementioned programmes had similar objectives and design to the Department. It was working towards designing an on-line system that had all these components that would be useful to suppliers and entrepreneurs.

In response to Mr Kruger’s question, he said that the costs of establishing such a system had not been determined. The Department had looked at a variety of packages that the portfolio provided. It would consider moving programmes and the relative budgets between SEFA and SEDA. It was responsible for policy formulation and strategy. so it still had to determine the budget for the elements that it would keep and the elements that would be allocated to SEFA and SEDA.

Mr Mabasa asked to what extent the Department had considered the fact that spaza shops and hawkers were declining at a rapid rate? Only those run by foreign nationals were thriving, while those owned by South Africans were failing. Also, recycling was an area that had opportunities -- to what degree had the Department taken this into account? Had it included the three spheres of government in its plans?

Mr Chance asked whether the merger between the Skills Education Training Authority (SETA) and the Department’s on-line system took into account the activities of Simodisa’s Venture Central site, which was a portal doing what the government intended on doing. It was striking that Simodisa had an arrangement with the DST, but not with the DSBD. Duplication should be avoided at all cost. The Department should engage with Simodisa, which was a non-profit organisation (NPO), to build the ecosystem.

Mr Maki responded to the spaza shop question by saying that the Department had a national informal business upliftment strategy. One of its aims was enterprise development. It had an initiative called the Informal and Micro Enterprise Development Programme (IMEDP) which had been developed for the Department to provide support to spaza shops. This programme had not been properly implemented. The Department would make an effort to identify its weak areas and commit to improving its implementation strategies in the next financial year. It was aware of foreign-owned spaza shops, and had identified that major retailers, like Shoprite and Pick ‘n Pay, were major competitors. This was a cause for concern. Therefore, the Department would make a concerted effort to provide support to spaza shops through the IMEDP.

He admitted that the Department had not dealt with the issue of recycling, but would consider it as it had a flexible plan.

In response to the question on the three spheres of government, he said that Ms Vries had had coordination forums with directors general from other departments which had implemented plans on SMMEs. There was also a provincial coordination committee. AT the local government level, the Department had partnered with the Makhado Municipality to improve its business infrastructure.

Mr Maki referred to the Finfind question, saying that the Department knows that there were many platforms like the one the DSBD wanted to establish. Simodisa was one of the stakeholders that the Department would consult about working together. Existing platforms were not being ignored. The aim was to establish a system providing support to small businesses that was owned by the Department and its agencies.

Minister Zulu responded to the spaza shops question, saying that the DSBD had taken an inter-ministerial approach to dealing with spaza shops owned by foreign nationals, which focused on security matters. The Department had included economic matters, and the support that spaza shops needed from a regulatory perspective. The local structures had to be strengthened to support small businesses so that the DSBD did not have to deal with everything on its own. Efforts were being made to deal with spaza shops owned by foreign nationals through the Pakistani association of spaza shops. She had had meaningful discussions with Pakistani shop owners and had signed agreements and memorandums of understanding (MoUs). The MoUs must now be implemented. The focus must be on supporting South African-owned spaza shops. The Minister had thought that partnering with the retail SETA would be effective, but that had not functioned well and the Retail SETA now found itself under administration.

Mr Mabasa said that spaza shops were not given enough support. When they no longer had support, they resorted to becoming hawkers. The Department must not stop supporting spaza shops. He knew that this would not be easy, because their products were generally of low quality. The police had a role in displacing locally-owned spazas shops.

The Chairperson observed that the Department had made improvements. However, on 9 July 2012, when the development of cooperatives had been assigned to the DTI, it had been announced that the Cooperatives Amendment Bill would result in the establishment of a cooperatives development agency. In 2018, the Department was recommending the establishment of such an agency within SETA. Was the DSBD’s approach to cooperatives’ development narrow, or was it taking a broad approach of positioning cooperatives as one of the three pillars that drive the transformation of the economy from being dominated by capitalism, making it a mixed economy? If the Department’s approach viewed cooperatives as a pillar for establishing community-owned enterprises, it would not have recommended establishing a cooperatives development agency in its presentation. SEDA in its current form would not incubate a cooperatives development agency. She admitted that the Department would be unable to answer her question, and advised the Minister to research this matter for future discussions.

She said that the DSBD’s integrated cooperatives development model did not address resuscitating the 88% of cooperatives which had failed. The Department focused on the pre-formation, formation, business opportunities, growth, expansion and agglomeration of businesses. It was problematic that there was an 88% failure rate, but money was still being used in the same way that it had always been used. She had expected the Department to take an approach that addressed the failure rate. Moving the Cooperative Incentive Scheme (CIS) to SEFA and SEDA would not address the problem, because the DSBD lacked the instruments to deal with the causes of the problem. The cause of the problem was not that the CIS was within the Department, it was because it had a narrow view of the purpose of cooperatives in the country.

The Chairperson said that in relation to Resolution 55 of the tracking tool, the review of the programme should prioritise the process which would lead to reduced expenditure. For example, she had gone to Thathane with the Department. Thathane needed funding for a feasibility study. There was already an investor. A pre-feasibility study showed the types of enterprises that could be developed in that area. The investor who wanted to partner with a secondary cooperative had agreed that an investment of R1.2 billion was needed in that area. The Department could not fund a cooperative with R1.2 billion, but a private sector investor was prepared to contribute 20% of the principal amount needed. Because the Department had a narrow perspective, it had not considered discontinuing the CIS and shifting the budget to funding feasibility studies.

A feasibility study and a master plan would attract private investors to partner with communities to establish community-owned enterprises. That was a broader perspective which the Department should adopt. Spending small sums of money on communities would not develop the economy. The Department must separate SMMEs and cooperatives. Cooperatives must be seen as a tool for economic transformation and a mixed economy. South Africa was currently dominated by capitalists. Communities needed to participate in the mainstream economy. The ANC had chosen cooperatives to help community-owned enterprises. She was impressed with the Department’s plans for SMMEs, but not pleased with its approach to cooperatives.

The Chairperson said she wanted a written report on the Department’s commitments to cooperatives’ development within a week. A cooperative development agency must be established. The Department must take into account that there were people trained in cooperatives’ development as part of community economic development.

Briefing by SEFA on its Business Rescue Strategy

Due to time constraints, the Chairperson asked SEFA to make brief comments about its proposal, which would later be expanded on at another Committee meeting. If the Committee had taken videos during their oversight visits, the Department would understand why it needed to act. During the visits, the Committee Members were reduced to tears because of the way things were. SEFA needed to know what kind of situations the Committee had come across and formulate ways of solving these problems. When SEFA was established, it had fallen under the Economic Development Department (EDD) and it had established a subsidiary company. SEFA was now under the DSBD, which had a different way of tackling issues. SEFA was not an agency for financial gain; it was a development financial institution. SEFA needed to determine whether its primary objective was development or making a profit. The Department’s objective was to create jobs and reduce severe poverty. DFIs had to play a role that was different from that of banks. The Committee needed more time to discuss matters with the Department. The Committee had instructed the Department to look at a few cases to illustrate that there was a need for the government and its entities to address the problems faced by the people which the government served. The Department must assess whether its current measures addressed the funding issues faced by small businesses, whether there was a need to provide training, to review legislation or the Department’s mandate for what should be done. The Department could not continue in the manner in which it was functioning, as implementation was not taking place. People should rejoice when the DSBD made its field trips. Many communities were disappointed in the Department’s work, and did not want to engage with it.

Mr Makhuvha spoke generally about SEFA’s business rescue strategy. Essentially, SEFA did not initiate business rescue for defaulting debtors but participated in business rescue proceedings due to the challenges faced by small businesses. SEFA preferred to restructure debt timeously. The presentation document provided contained the details.

Mr Paul Maboa, SEFA’s General Counsel, discussed the remedial actions on litigated projects in the Free State. The presentation document contained the details.

Discussion

The Chairperson said that the Committee needed to discuss the topics raised further, like the integrated planning approach taken by the Department which sought to bring common thinking between the DSBD, SEDA and SETA. The Committee welcomed that synergy. At times, these three entities worked independently without consulting each other. They should not work in isolation as they were all part of the economic transformation cluster. Other functions of the cluster were performed by other departments and spheres of government. SEFA granted loans, but the number of loans given out must be reduced. A start-up business should not have to get a loan for things that it could be given a grant for, and should not have to pay for services that could be paid for by the agencies.

When SEFA reported to the Committee, it showed that SEFA had not approached issues in the way it was mandated to. Economic development and small business development were on different levels; for example, the Department would receive requests for support from persons who merely had a business idea but had not implemented their plans. The DSBD needed to reduce the exposure of small businesses to loans that had a high interest rate. It had not considered facilitating the establishment of cooperative banks. Establishing such banks would reduce the risk of defaulting clients. Instead of giving money to intermediaries, the Department could give the money to cooperative banks. Cooperative banks had the same principles as any other cooperative. If one cooperative failed, the employees of that cooperative were moved to another cooperative. That did not happen in a capitalist system. Cooperatives had a non-profit agenda, which was about social and community development. If SEFA understood that, they would work with the Co-operative Banks Development Agency (CBDA) to establish cooperative financial institutions and stop working with intermediaries.

If SEFA worked with SEDA to train entrepreneurs before they were given funding, it would avoid many of the problems it faced. The Committee understood that SEFA was accounting to the DTI, but from the outset the Committee had noticed that SEFA did not have a plan. It was not possible to have a strategic plan with SEFA and the DSBD working in isolation. A deadline needed to be set for the Department and its agencies to report on how they would implement their proposals.

Mr Makhuvha said that SEFA had formed three committees that were working with the Department and SEDA. These committees focused on:

Business rescues for small businesses;

How to help failing cooperatives by providing post-commencement finance, for example;

Development of cooperatives;

Business support from SEDA.

The Chairperson asked that at the next meeting, the DSBD and its agencies report on whether the work done by the Department was responding to the problems faced by small businesses. Committee Members preferred going on study tours instead of being confronted with tears every time they went on field trips. What was discussed in Committees generally took a long time to be implemented, but this needed to change, as the Committee was very practical. What was happening in the Free State was happening through the country, and the Department needed to formulate solutions.

Mr Makhuvha said that there were many challenges, but there had also been many improvements. The Committee had given the Department a very positive report, with constructive criticism.

The Minister commented that the Committee’s report was positive. She focussed on the Committee’s recommendations. The Department used the Committee’s reports on its field trips to address issues faced by communities. The Committee was generally disappointed when they visited communities, and the Department would work on reversing this perception. She admitted that the Department needed to work more with its agencies.